Posted: 08/2002

All in Good Time
Costs, Soft Economy Slow IP PBX Adoption

By Josh Long

THE SOFT ECONOMY AND technological
challenges have stymied widespread adoption of IP telephony during the last few
years, but experts say businesses that need to replace their legacy phone gear
eventually will incorporate converged voice and data systems, including IP
private branch exchanges.

The LAN telephony market reached
approximately $1 billion in sales last year, triple that of 2000, according to a
study consulting and market research firm In-Stat/MDR released in March.

About four of 10 U.S. companies with
more than 500 employees are beginning to convert their phone systems from
traditional PBXs to IP LAN technology, market research and consulting firm
InfoTech reported in January.

"There is little doubt right
now that this is the direction PBX technology is moving towards," declares
John Shaw, director of marketing with the voice technology group of Cisco
Systems Inc. "This has moved beyond the stage, ‘Will this technology cut
it?’ to ‘How quickly will an enterprise/SMB customer adopt this
technology?’" Market leader Cisco Systems Inc. has sold nearly 1 million IP
phones to about 3,000 enterprise customers, Shaw says. In-Stat/MDR says Cisco’s
2001 sales exceeded the sales of the entire market in 2000, growing by 140.9
percent from 2000 to 2001.

But experts say the sluggish
economy, IP telephony’s imperfections, the pending adoption of vendor standards
and a steep learning curve challenging voice and data distributors have slowed
growth.

Value added resellers, systems
integrators and other IP telephony distributors have found it challenging to
sell the hybrid systems during a soft economy. Many companies have curbed IT
spending since fall 2001. In the United States, IT spending contracted 3.5
percent in 2001, says a May 2002 study from IDC. The research firm predicts
spending to rise 3.7 percent this year before staging a full recovery in 2003.

"I think there has been a
slower rate of adoption of this technology then people had forecast two or three
years ago" due to economic uncertainty and the overall state of the
beleaguered telecom sector, says Fred Brussee, CEO of St. Louis-based
CT-Innovations, a systems integrator. "We are seeing a lot of customers
deferring decisions that would have been made this year. I don’t think they are
disappointed with what the technology has to offer."

But some experts say the
slower-than-anticipated growth rate is partly the fault of the distributors.
Many data VARs selling IP PBX systems are LAN experts, but they have no
background or little experience in voice, say some analysts. "Most of the
VARs had no expertise in applications and customers could not depend on them for
help to … optimize their system," says Allan Sulkin, president of
Hackensack, N.J.-based TEQConsult Group, a consulting, market analysis and
research firm specializing in enterprise voice communication systems. It is what
a company does with a PBX system that gives it value, he says.

Gartner senior analyst Kathleen
Simpson says all vendors are working to educate distributors about systems that
require expertise in voice and data technology. Decades of experience can’t be
learned overnight, but Simpson points out, "It’s not rocket science,
either."

"It’s a cultural change,"
she says, but one apparently worth the pain. Typically a distributor that
understands LANs and voice systems earns a fatter paycheck, Simpson adds.

It’s not an easy or quick sell,
though. VARs and systems integrators say it could take 30 days to 1¹/2
years to close a sale of the new LAN telephony technology. Part of the reason
for the long sales cycle is the cost.

Alcatel’s OmniPCX 4400 system costs
about $1,000 per IP phone for 100 phones, says Chad Morris, general manager of
Salt Lake City, Utah-based interconnect company, Tri-Tel Communications Inc. The
price includes the switching gear and the cost per unit declines if the company
buys more phones. A company purchasing 500 phones would spend about $600 per
phone, Morris says.

Companies buying IP PBX systems
often are moving offices, expanding their business or supporting employees off
site. Simpson says the sweet spot for IP telephony is offices with less than 100
phones because "reliability and "scalability" is less of a
concern. She says those two metrics are proving to be the biggest hurdles to
widespread adoption of IP telephony.

No company, however, has implemented
"all IP" throughout its communications architecture, Sulkin says.

He notes many vendors embellish
their achievements in the market, touting impressive numbers that do not
accurately represent sales figures and the extent to which U.S. companies have
implemented LAN telephony systems. For instance, vendors a few years ago began
shipping free IP phones to companies for trials. And while a company may buy a
handful of IP phones that does not mean it trashed its circuit-based legacy
system.

Furthermore, IP is not always the
perfect choice. LAN telephony technology can be less reliable and more expensive
than legacy systems, perhaps requiring an upgrade of a company’s LAN or wide
area network, Sulkin says.

Still, there is no doubt IP voice
systems are starting to encroach on the standard PBX market. The U.S. market for
traditional PBXs and Key/Hybrid systems with at least 10 phones declined by 20
percent in 2001 compared to 2000, reports InfoTech. During the same period, IP
LAN telephony shipments tripled, the research firm says. The technology
represents 12 percent of the new line shipments in the overall market.

Brussee of CT-Innovations says most
of his IP PBX implementations represent "aggressive migrations."
"They may not be complete replacements but they are replacements of greater
than 50 percent of a company’s" telephony infrastructure.

CT-Innovations, which also sells
Alcatel’s IP PBX equipment, promotes the LAN telephony technology to companies
with legacy systems more than five years old and to businesses that need to
support mobile workers and contact centers. The systems integrator recently
installed a redundant data network and replaced phones for an Illinois bank that
eventually wants to facilitate Web-enabled transactions. Only the bank’s remote
branches have IP phones; the rest is digital. Brussee says his company lets the
client determine where they want — and need — the IP telephony, particularly
where the new technology does not offer any benefits over legacy systems.

"No one is confident IP
telephony will be as good or reliable as the current technology and that is an
accurate statement," Tri-Tel’s Morris says. "It isn’t."

Tri-Tel was a PBX Fujitsu dealer
until receiving a phone call last September. Tri-Tel learned Fujitsu no longer
would be selling its PBX equipment in North America, Morris says. "We had
enough foresight to take on the Alcatel line prior to that," he says,
adding Alcatel’s solution "lets people gradually move into the IP
market."

Tri-Tel is targeting
"industries that are critical to everyday life and certainly government
agencies" as well as health care organizations and colleges, Morris says.

But there is no one "customer
profile that fits IP telephony best," says John Freres, president of
Schaumburg, Ill.-based systems integrator Meridian IT Solutions, formerly known
as N2N Solutions. In addition to tech-savvy businesses, traditional
organizations such as medical and insurance companies are implementing the IP
telephony systems, he says.

Since completing an installation in
the summer of 2000, the company has installed 30 to 40 IP PBX systems in the
Chicago area, he adds. Meridian uses Cisco’s IP PBX gear.

Experts say technology companies
that have over-promised and under-delivered are part of the reason IP telephony
hasn’t gained wider adoption.

LAN telephony distributors say
applications made possible on a converged voice and data network promise to
change how companies think about — and use — the telephone. Morris cites a
display interface on a phone that would allow school administrators to pull up
the picture ID and class schedule of a student wandering the halls. The
application is available through Telrad Tenecs, an Israel-based
telecommunications equipment manufacturer.

But PBX guru Sulkin, who teaches PBX
management seminars throughout the country, says U.S. companies and other
institutions have yet to implement those kinds of applications. "They can
talk all the applications they want. Nobody is implementing them," he says.

U.S. LAN Telephony Revenue Forecast
Source: In-Stat/MDR